Treasurys lose ground; long bond rises 12-7-98

JulieRannazzisi

NEW YORK (CBS.MW) --Treasury issues slumped Monday with the exception of the bellwether 30-year bond, which managed to stay afloat.

The firm dollar was able to keep the long bond well bid but short maturities lost their luster, upset by a rebound in U.S. stocks.

Alan Ruskin, chief economist at 4Cast, said he believes there is a general lack of value in the front end of the curve with the fed funds rate target at 4 3/4 percent. He said it was a reasonable bet that the Fed wouldn't ease at its next two Federal Open Market Committee meetings.

All Treasury yields -- with the exception of the long bond -- have yields below the fed funds rate but Ruskin said the 2- and -5-year sectors were particularly vulnerable to selling pressures.

The 30-year benchmark Treasury issue (TRE=Z3-GB) gained 5/32 to yield ($TYX)
TYX, -0.93%
5.036. The 10-year (TRE=Z0-GB) lost 10/32 to yield ($TNX)
TNX, -1.21%
4.666 percent while the two-year (TRE=Y2-GB) declined 1/8 to yield 4.524 percent. The discount rate on the 52-week bill (BIL=Y1-GB) was up seven basis points at a discount rate of 4.36 percent. In the futures pit, the March T-bond contract closed off 15 ticks to 129-01.

Traders said dealings were razor-thin for the brunt of the session and observed that price movements lacked conviction. Short-dated issues were hit the hardest Monday while the dollar's firmness aided the long bond, producing more yield curve flattening. In fact, the difference in yield between a 30-year bond and 2-year note narrowed substantially to 51.2 basis points from 58.9 basis points at the close Friday.

Mark Mahoney, Treasury market analyst at Warburg Dillon Read, said the strength of Friday's employment report sank into the market over the weekend and players began to liquidate their positions and cheapen up the front end.

Mike Ryan, senior fixed-income strategist at PaineWebber, said the market was sort of drifting in a directionless fashion, adding that Treasurys were taking their cues only from the greenback as well as the performance of global equity markets.

The intermediate sector staged a shabby performance but Ryan said he wasn't surprised, given the nice run-up in the 5- and 10-year sectors in the past weeks.

Meanwhile, the Bridge/Commodity Research Bureau's index lost 23 points to 194.87. Dollar/yen was recently at 119.83, up 1.0 percent from Friday's levels. See latest currency rates.

A Japanese newspaper report indicating that Treasury Secretary Robert Rubin's resignation was imminent -- promptly denied by the Treasury -- has only a small negative impact on the dollar in Asian dealings. The recovery was full in Europe and traders continued to take the dollar higher in U.S. dealings. Rubin will speak Monday evening at the New York National Foreign Trade Council.

Year-end moves

As the market moves closer to year-end, more and more shops will be "dressing up" their balance sheets by ridding themselves of spread products such as corporate and mortgage-backed issues. In addition, traders will be dumping older -- or off-the-run -- Treasury issues in favor of the most recently auctioned paper. These moves all take place as Wall Street shops pursue one common goal: increasing the liquidity of their holdings.

Ken Fan, bond strategist at Paribas, notes the typical year-end phenomenon of wider spreads between off-the-run and on-the-run Treasury issues, which suggests players are dumping the former in favor of the latter.

Fan said funds have been de-leveraging in the past week as they prepare to close their books, adding that market participants will become less and less aggressive in their position-taking as the month progresses.

As an indication of the diminished popularity of spread products as the year comes to a halt, Fan observes that the spread to Treasurys of liquid 5-year Fannie Mae notes have widened by about 10 basis points since Thanksgiving.

Elsewhere, only second-tier economic releases were unveiled Monday, including Challenger November layoffs, which fell 44 percent from October's levels to 51,642.

In other news, October consumer credit rose a huge $9.7 billion compared to expectations for a $6.1 billion rise. September's numbers, however, were downwardly revised to show a $5.1 billion gain from the previously reported $8.4 billion.

Tuesday's data cup will be dry, with only the weekly retail sales gauges from BTM/Schroders and LJR/Redbook set for release.

The market must wait until Friday to get a taste of the week's meatiest data, which will come in the form of the retail sales report and the producer price index. Market participants are anxiously awaiting the November retail sales data for evidence on how strong consumer spending was at the onset of the Holiday shopping season. See , , and

Ryan of PaineWebber said he doesn't believe the retail sales report and PPI will produce a whole lot of movement unless the numbers come at levels that defy the market's expectations by a wide margin.

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